Shareholders Matter

Commentary

It's time that shareholders stand up and their voices are heard. The old days of trusting in the so called "experts" in finance are over when these wizards are only expert with other people's money in their own pockets.

The American experience has shown that responsibility at the top only comes from an active participatory grassroot.

Excerpts

The country's top banks were overwhelmed by a shareholder revolt on Thursday as investors defied boardroom diktats and voted for a say on executive pay.

The uprising of rank-and-file stockholders was staged at annual meetings from Vancouver to Quebec as bankers faced the public for the first time since the onset of an increasingly severe recession.

The mutiny reflects mounting popular disquiet over the gilt-edged bonuses being awarded to bank executives amid a market crash triggered by a crisis in the financial system.

"There is a public groundswell against some of the excesses we are seeing," said Doug Pearce, who invests $80-billion on behalf of public pension funds for BC Investment Management.

The across-the-board insurgency against Bay Street on Thursday has little precedent, as successful insurrections by shareholders are rare in the history of corporate Canada.

"This is quite a momentous day. We are seeing shareholders using the power they have to send a very strong message," said Stephen Griggs, head of the Canadian Coalition for Good Governance.

"The shareholders have spoken," said Bill Etherington, the outgoing chairman of CIBC, after majority votes in defiance of his board and the directors of Royal Bank of Canada, the country's largest bank.

A chastened David O'Brien, chairman of RBC, said: "The board will now be considering how best to give shareholders a vote on this important issue."

National Bank also caved into pressure and agreed to give shareholders a non-binding vote on executive pay.

"The reaction is fairly natural," said Mr. Etherington, who added that in boom times large payouts were "more acceptable, but once the performance went away the logic changed quite a bit."

The investor anger comes after a fall in the shares of Canadian banks of more than 50% since the onset of the credit crisis, though Bay Street has fared better than American banks, which have seen an 80% drop in value amid government bail outs.

Ottawa has not provided Bay Street with cash injections, but has agreed to take assets off banks' books for a fee, and Thursday launched a scheme to guarantee bank debts.

The move commits taxpayers to repaying more than $200-billion of banks' debts if they are unable to pay back funds borrowed in international money markets.

This incremental transfer of risk from the private sector to the public sector has helped stoke the beginnings of a public backlash against Bay Street and heightened criticism of CEO pay.

Bank lobbyists fear this may lead to greater political scrutiny and interference in the affairs of financial institutions.

There were also fresh critiques of banks from community groups protesting credit card fees as well as limited financing for economic development in hard-hit areas of the country.

RBC was singled out for criticism at its annual general meeting for funding a pipeline that TransCanada is planning to build through a community in northern Alberta.

"If RBC is serious about supporting clean water ... why are they financing projects that are contaminating the lakes and rivers around my community?" asked Melina Laboucan-Massimo, a member of Lubicon Cree Nation, which is opposing the pipeline.

Community organizations and small shareholders also joined in criticism of compensation practices.

Bruce Campbell, head of the Canadian Centre for Policy Alternatives, said: "The party is over. This is a signal that it ain't no more business-as-usual for CEO pay. The bubble has burst and shareholders are demanding they come down to earth."

Large investors said the revolt suggested bank boards had not given an adequate hearing to private appeals to show restraint over executive compensation and better link pay to performance.

Mr. Griggs, who represents investors with about $1.4-trillion under management, said: "What has happened today indicates that mainstream large institutional investors have shown they are very concerned about executive compensation and are willing to use their votes to send a message."

Several bank chief executives have shown more sensitivity than their boards to public opinion, and have agreed to surrender part of their 2008 bonuses.

The backlash at the annual meetings came despite a rare rally in bank shares, which had one of their best trading days in recent months.

The bank index on the Toronto Stock Exchange rallied 6.8% after RBC reported net earnings of $1-billion for its fiscal first quarter and CIBC managed to a profit of $147-million despite significant losses for both banks on investments in financial markets.

Analysts said RBC's financial performance was commendable given the economic backdrop.

-- with files from Barbara Shecter